Vote: Did the Fed do the right thing?

In her congressional testimony earlier this week, Federal Reserve Chair Janet Yellen said it would take at least five to eight years to shrink its balance sheet (above) from record levels back to where it stood before the financial crisis.

Even with the so-called taper, the central bank is still buying $45 billion in mortgage-backed bonds every month, compared with $85 billion at its peak. For all that, we have a tepid recovery, a continuing unemployment crisis and a weak housing sector.

On the other hand, the Fed avoided a second Great Depression by acting as lender of last resort, driving down interest rates and keeping credit loose. On the fiscal side, Washington, D.C., has been locked in the dogma of austerity — something President Ronald Reagan and his fellow Irishman frenemy House Speaker Tip O’Neill certainly didn’t do during and after the terrible recession of 1980-82. The Obama stimulus was too small and went heavily to backfill the damage to local and state governments. So the Fed was on its own.

At the moment, the Fed has time to bring the balance sheet down. Inflation is low. If another recession hits, well… And did the Fed’s extraordinary measures create fresh bubbles? Maybe not on the level of the housing mess, but there’s student loans and perhaps the stock market. Evidence is mounting that monetary policy is less effective against this “secular stagnation.”

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